The Importance Of Listing Of Bonds And IPOs

Due to their complex and diversified natures of most bonds in terms of time-weighted values and variable payment patterns, most of these Asset-Backed Securities are executed in an “over-the-counter” market between dealers rather than on an exchange in the United States. However, there are certain bonds such as corporate bonds that are traded in the NYSE.

In the financial market of Hong Kong, there has been tremendous demand for a more secure investment product than stocks. There were certain corporate bonds issued primarily by the blue chips companies in recent years, but they had never been popular due to their unsecured nature and they were all privately placed to institutional or strategic investors. Most of these locally issued bonds are currently traded in the secondary markets in Luxembourg, London, Frankfurt and New York. Some quality bonds issued by the MTRC and HKMC have been well received by the market simply because they are better structured in terms of yields and credit quality as well as they are backed by the full faith and credit of the Hong Kong SAR Government.  

Local investors have very few investment options available in the financial market, particularly in the present ailing economy with the interest-rate approaching zero, however, the growth of local and regional investment trusts have been very substantial. After the introduction of Mandatory Provident Fund (MPF) in Hong Kong at the end of 2000, a huge pool of fund is generated every year from the local market, which creates greater demand for more secure products such as bonds for long-term investment. The urge for a more mature and diversified investment market in Hong Kong is indeed imminent.

There are stages and benchmarks set for the development of the bond market in Hong Kong, as the whole financial sectors that include the government, banks, funds, insurers and reinsurers, issuers, sponsors, and servicers as well as the general public need time to learn and adapt to the changing investment behaviors.  In the very beginning, only those bonds that are single-issuer based and whose nature is simple and structure is straight forward tend to be more suitable for general investors in the developing bond market in Hong Kong.

Followings are benchmarks and criteria for the underlying structures of bonds during the developing stage,

It is important to make bonds as transparent and comprehensive as possible that enable public participation by general investors rather than the current “over-the-counter” market in the United States, where transactions are executed solely between dealers in the secondary market. Due to its current closed up trading nature, price of a bond normally includes a markup, which constitutes the dealer’s costs and profit. It varies from one dealer to another during price marking in the secondary market. In some instances if a broker or a dealer has to seek out a specific bond that is not in their inventory for a customer, a commission may also be added. Such high costs found in trading of bonds surely hinder the attractiveness and growth of the bond market. Bond trading can become more competitive and fair to all investors whenever the price is marked to or quoted from an open market system.

Followings are highlights of benefits for the listing and IPOs for bonds in the market of Hong Kong,

With respect to its popularity and success in the U.S. market, bonds could become an attractive investment product for individual investors in Hong Kong, largely as a result of the attractive yields, relative creditworthiness and diversity of available investment options. To the extent, different characteristics of guarantees, redemption features and income patterns being structured in these securities further suit investors with different investment expectations and wider range of risk tolerance as compared to those traditional investment mechanisms.

Both government and private-label mortgage securities should be traded in a more regulated manner in the open market through listing on an exchange due to its enormous investment volume and large number of diversified investors involved. In addition, Land, Property and Mortgage Bonds play a crucial role in the long-term availability and cost of financing in the real estate market. It also works as an autonomous regulator and buffer for mortgage lenders and bankers by providing an access to an enormous pool of capital that make financing cheaper and the flow of funds more efficient.

The introduction of Bond listings and IPOs is just the beginning with many more market diversification to follow.

As the property market has been important to the investment market as well as the overall well being of the economy of Hong Kong, it is crucial to facilitate new sources of capital into the respective sectors in order to stimulate growth or to the least effect, maintain its upward momentum. All possible direct or indirect capital inflows whether they are in forms of Land Bonds, Property Bonds and Mortgage-Backed Securities will benefit the property market with greater effects. The importance of relevant listings and IPOs for these bonds further attracts greater market participation from various investment sectors which include local, regional and global funds.

To cope with these market changes, the foremost change required is its policy changes and openness of the regulatory bodies including the HKMA, SFC and the HKSE. Once the required regulatory and monitoring functions are built into the financial trading system, there will be many more diversification opportunities ahead such as issues of municipal bonds for the provincial, city and urban governments in China and neighboring countries for funding required for infrastructure, social and community developments, and public works when the market matures. To pursue such mission and market prospectus are vital to the success of making Hong Kong become the major issuing, funding and trading center for debt securities in Asia and the world as well.

Listing & IPO
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The Open Market
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Bond Trading
A vital mechanism for the financial supermarket